Controlled Group

Controlled groups can be formed by businesses that share common ownership. The employees of companies that are in a controlled group (under common control) must be treated as though they are employed by a single employer for most retirement plan purposes.  Employees of a controlled group member may or may not be able to be excluded from a  plan depending upon whether their exclusion will pass the coverage and participation tests.  Controlled group determination also affects compensation, and Key/Highly-Compensated employee status.  It is an important and fundamental issue in the design and operation of a qualified retirement plan.  This article is only a brief summary and is not intended to be an in-depth analysis of this complex subject.

The controlled group rules for retirement plan purposes are not the same as the controlled group rules for income tax purposes, although there are a lot of similarities.

There are three types of controlled groups:

• Parent-subsidiary: the parent organization owns at least 80 percent of the voting power or value of a subsidiary organization.
• Brother-sister controlled group: the same five or fewer individuals, estates, or trusts have both “effective control” and a “controlling interest” in all members of the group.  Effective Control is ownership of more than 50 percent of each business, counting each owner’s interest where it is the least. For this purpose, only identical ownership is considered. For instance, if Jane Smith owns 30 percent of ABC Company and 25 percent of XYZ Company, only 25 percent is counted for this requirement. Controlling Interest is ownership of at least 80 percent of each business in the group.
• Combined group: a combination of parent-subsidiary controlled group and brother-sister controlled group exists.

Ownership can be direct or indirect.  There are family attribution rules: examples of some of the rules: spouses are deemed to own each other’s interests in a business, with very limited exceptions; parents are deemed to own the interests of their minor children and even of their adult children in some circumstances.  There are additional rules for attributing ownership through estate and trust interests, option interests, and pass-through ownership.

Affiliated Service Group

Two or more related service or management organizations, whether or not incorporated. Employees of the members of an affiliated service group are treated as employed by a single employer for plan qualification purposes.  These rules are very complex and involve more than just ownership and sometimes involve no ownership at all.

If your company falls into one of the above categories, you will need to seek legal or accounting advice and provide determination on an annual basis to TSC in the Year End Questionnaire.

Business owners — Are you saving enough for YOUR retirement?

The contribution limits that apply to 401(k) and Profit Sharing plans make it difficult for high-income business owners to accumulate enough money to provide adequate replacement income for themselves when they retire.  A Cash Balance pension plan enables such individuals to “catch up” on the retirement asset accumulation they need by providing the means to make larger contributions that are targeted on certain participants in the plan.  These contributions, to select participants, can be as much as $150,000 for a 50 year old, and $200,000 for a 60 year old.

Who should consider a Cash Balance Plan?.

• Business owners wanting to deduct amounts in excess of $45,000
• Professional service groups (e.g. physician groups, dental practices, law firms, and other professional groups)

Contact the TSC  Sales Team at 952-806-4300 to have an illustration prepared to show what a Cash Balance plan could do for you.

A Good Time To Review Your Retirement Plan

During the past 10 years many positive legislative changes have occurred that enable a qualified retirement plan to be a most useful vehicle for building up the assets required for a successful retirement.  This is especially true in regards to what we have seen in the last 5 years where additional changes have been made to provide a greater benefit to the middle and upper middle income working Americans who are getting closer to retirement age.  There are features that plan sponsors can adopt to make their plans as successful as possible.  The EGTRRA Restatement is just about to begin.  We have written to our clients about this required rewrite of all qualified plans.   This is a perfect time to consider adopting new features for your plan.

Group Allocation (also called cross-testing or “new comparability”) features enable the retirement plan sponsor to make a contribution of a different amount or rate to select participants.  This ability to target particular participants or groups of participants with higher contributions is a powerful tool for retaining and rewarding key employees, or focusing on higher paid, often older employees who may have some catching up to do in attaining their retirement goals.  This type of formula is subject to special testing, and works very well in most situations.

Safe-harbor 401(k) features enable the “highly-compensated employees” (HCEs) to defer as much as they wish up to the legal limits without having to worry about testing and return of contributions.  A modest 100% vested employer contribution, made as a match or as a contribution to all eligible participants is required to take advantage of this safe-harbor feature.

A new Qualified Automatic Enrollment safe-harbor 401(k) feature is available as a result of the Pension Protection Act (PPA).  This requires that eligible employees be automatically enrolled and that the employer make contributions that may be subject to a 2-year vesting schedule.  Other automatic enrollment features are also available under the PPA.

Roth 401(k) contributions have been available since 2006. This feature has not been adopted on as widespread a basis as was thought would happen, but it is a valuable benefit in any 401(k) plan.  Plans must be amended to incorporate Roth deferral features, and this can be done for 2008 provided the amendment is adopted before the end of 2008.

The TSC 401(k) Health Check™ will help you see if you have a successful plan and serve as a basis for review of your plan.  Call your TSC administrator and we will arrange for a consultant to meet with you.

Your plan document will govern which, if any, of the following options are available to participants. 

Hardship Withdrawals:

If your plan allows, a participant may request a hardship withdrawal, usually of salary deferral accounts (excluding earnings) in the event of financial hardship. A financial hardship may result from either a participant’s, their spouse’s or their dependent's.

• medical expenses;
• expenses from purchasing a primary residence (excluding mortgage payments);
• educational fees and expenses related to post-secondary education for all above-named individuals;
• prevention of eviction or foreclosure of primary residence;
• payments for funeral expenses for parent, spouse, children or dependents;
• expenses for repair of damage of primary residence as a result of natural disaster.

A hardship withdrawal cannot exceed the amount required to satisfy the immediate financial need. A participant must have attempted to acquire the needed funds by other commercially accepted methods, which might include a bank loan, insurance, discontinuance of salary deferrals, or if your plan allows, a loan from their vested account balance. If the hardship withdrawal is from the salary deferral account, the participant must stop deferring into the plan for a period of 6 months. Hardship withdrawals are not allowed from Safe Harbor accounts.

Since hardship withdrawals are not repaid to the plan, a Form 1099-R will be issued and taxes and possible penalties will apply.

Participant Loans

If your plan allows, a participant may request a loan not to exceed 50% of their vested account balances. The minimum loan amount is usually $1,000 (although the plan may allow for a lower minimum), with a maximum of $50,000. Most plan documents allow a loan to be taken for any reason. However, an employer can elect to establish more stringent requirements. Most often, plan provisions will also limit the number of outstanding loans a participant may have. The applicable interest rate is disclosed in the loan policy and varies for each plan.

Generally, the participant is required to pay the loan back through payroll deduction. The standard repayment period for a loan is no longer than 5 years (though it can be much shorter), with an exception for loans used to acquire the participant’s primary residence. Loans to acquire a primary residence may use a repayment period that exceeds 5 years. An amortization schedule and promissory note are created, to provide a legally enforceable agreement for the loan. There are no penalties for early repayment.

Loan repayments must begin within a reasonable time (no more than 90 days) from the inception of the loan. If a participant delays payment for more than 90 days, the loan must be declared in default. A default results in the remaining balance of the loan being treated as a taxable distribution from the plan.

Generally, when a participant who has an outstanding loan is terminated, they can either repay their loan in full at the time of termination or the outstanding loan will be defaulted resulting in a taxable event reported on a Form 1099-R.

In-Service Distributions

Unlike a hardship withdrawal where a specific financial hardship permits the participant to take the distribution, if your plan allows for in-service distributions, a participant can take an in-service distribution for any reason.  Generally, certain age and/or service requirements set forth in the plan document may apply.

The most notable requirements for receiving this type of distribution are achieving a certain age (commonly 59½) or service requirement (10 years’ service). The participant is entitled to all or part of their 100% vested and non-forfeitable interest in the plan.

Since in-service distributions are not repaid to the plan, a Form 1099-R will be issued and taxes, and possibly penalties, will apply.